E-commerce specialist dLocal (DLO 1.78%) has a clear mission, and that is to "enable global merchants to connect seamlessly with billions of emerging market users." The Uruguay-based company connects merchants to more than 2 billion people in 40 countries (and counting) through more than 900 different local payment methods. As a result, it is becoming a must-have for enterprises looking to grow in emerging markets.
The company went public in 2021, but its shares remain 81% below their all-time highs. Despite this share price drop, I'd argue that dLocal is a much more robust business now than it was four years ago. While its shares have languished, the company's sales have grown 600% since its initial public offering (IPO).
Thanks to this divergence between its declining share price and improving operations, I believe it is time to reconsider buying dLocal. Here are four reasons I have been adding shares of this spectacular tech stock in February.
NASDAQ: DLO
Key Data Points
1. DLocal is far from a "broken" IPO
DLocal solves numerous payment pain points for merchants, such as cross-border and localized payments, foreign exchange settlements, and tax management and compliance. Simply put, dLocal's payment platform boosts merchants' acceptance and conversion rates among customers in emerging markets who may not have access to international credit cards.
Image source: DLocal 2023 investor presentation.
The company expanded from serving eight countries with 80 payment methods in 2016 to serving 40 countries with over 900 payment options today. However, due to the intricacies of each country's regulations and the time it takes to partner with local payment services in each new geography, dLocal's quick growth has weighed heavily on its margins.
DLO Gross Profit, Operating, Net Profit, and Free Cash Flow Margin data by YCharts
This decline is not a bad sign, though. DLocal is sacrificing today's margins in the name of building a stronger network. With each country and payment option, its value proposition to merchants becomes more challenging for peers to replicate, meaning it carves a wider moat around the business.
Best of all, dLocal's free cash flow (FCF) margin of 21% remains very respectable, and the company isn't at risk of going bankrupt as it continues growing.
2. DLocal's value to merchants keeps growing
Not only does dLocal's value proposition to its merchants grow with each new country it adds, but the countries themselves are also growing. DLocal focuses on connecting enterprises with customers in countries across Latin America, Africa, and the Asia-Pacific area, which should see their urban gross domestic product grow 3.5 times faster through 2040 than those of developed markets.
The company already targets over 2 billion potential shoppers in these countries. By 2028, management believes these countries will make more than $3.7 trillion in digital payments annually. With internet and e-commerce penetration rates in these emerging markets still lagging behind those of developed markets (but quickly improving), the potential growth runway for dLocal (and its merchants) looks decades long.
Already serving mega-enterprise merchants like Amazon, Spotify, Uber, Shopify, and Netflix, dLocal should thrive as these companies look beyond their primary focus on North America and Europe.
3. Pedro Arnt's move from MercadoLibre is encouraging
Investors should note the leadership of CEO Pedro Arnt, who came from Latin American e-commerce and fintech juggernaut MercadoLibre in 2023. Arnt went from CFO at MercadoLibre to CEO at dLocal, and I find it telling that he would choose to leave the fintech platform he helped build, MercadoPago, in favor of a similar peer.
It reminds me of a comment many years ago by Motley Fool Money podcast host Chris Hill, who observed that if there's a spinoff at a company and the CEO transfers to the newly spun-off entity, that's the one he wants to own. While this isn't a spinoff situation, I believe it is similar in the sense that Arnt sees something more interesting in dLocal's potential, so he made the move.
Having already helped transform MercadoLibre from a fledgling e-commerce prospect into the behemoth it is today, Arnt could be the perfect person to help dLocal (founded only nine years ago) move into a more mature stage.
4. The company is producing solid cash flow and buying back stock
DLocal's expansion plans hinder its margin profile, but the company remains a pretty solid cash cow. In fact, even though it is a "growth stock" -- delivering total payment volume and revenue growth of 41% and 13%, respectively, in its last quarter -- the company has already started returning cash to shareholders.
Using up all of a $100 million share buyback plan in 2022 and half of a $200 million repurchase plan last year, the company has lowered its share count by 2% annually since 2023. This is in stark contrast to many growth stocks, which often have ballooning share counts due to excessive stock-based compensation or growth-at-all-costs shareholder dilution.
DLO Shares Outstanding data by YCharts
With the company's net take rate remaining flat over the last three quarters, dLocal could be on the verge of ending its declining margins. If this proves to be the case, dLocal and its growth potential could be a steal, as the company trades at just 27 times FCF today -- slightly below the S&P 500 index's average.
